16 IRRRL Program Pros and Cons

The IRRRL Program stands for “Interest Rate Reduction Refinancing Loan” and is often referred to as either a VA to VA product or a Streamline loan. This lending product is usually used to reduce the interest rate of a borrower when they have a high-interest mortgage they’re trying to manage or to convert an adjustable-rate mortgage to one with a fixed rate.

Unless you are refinancing an existing VA-guaranteed adjustable rate mortgage through the IRRRL Program, the result of this lending product must result in an interest rate reduction for homeowners.

You or your spouse must qualify for VA benefits to become part of the IRRRL Program. It is not a lending product that is available to most consumers in the United States unless there is honorable military service involved in some way. Most consumers must qualify for their first VA loan before they can become eligible for this additional service.

If you are dealing with a mortgage interest rate that feels too high, then here are some of the pros and cons of the IRRRL Program you will want to consider.

List of the Pros of the IRRRL Program

1. There is no appraisal required by the VA for this program.
The VA does not require your home or property to go through an appraisal process for you to qualify for the IRRRL Program. It will use the information which is available from your property when you initially qualified for the mortgage in the first place. That makes it a lot easier to get the application process started for most families, especially since the reason for the interest rate reduction is to lower the monthly payments which are due for the mortgage.

There are other fees that the VA does not allow to be charged to veterans either when using the IRRRL Program. You cannot be charged a brokerage fee, commission, or buyer broker fee if you are a qualifying veteran.

2. You do not need to have a credit underwriting package from the VA.
The VA doesn’t need you to go through another credit check to qualify for the IRRRL Program either. It will use your previous information to qualify for this benefit if you decide to pursue it. That means you can potentially reduce the interest rate of your mortgage even with a FICO score that would not be considered by a traditional lender. If you already have an average credit profile before you apply, then the chances for approval are reasonably strong.

3. A certificate of eligibility is not necessary with the IRRRL Program.
When you apply for the benefits of the IRRRL Program, then you will not need a certificate of eligibility as you did when you first applied for your VA loan. The lender which offers this option to you can use the e-mail confirmation that they received from the VA as evidence that you can pursue this option. Some lenders might decide that they want the certificate just to make sure everything is in order before extending the offer, but there is no requirement to have this paperwork available at the time of approval.

4. It works with your existing property to create a refinancing option.
The IRRRL Program works for properties which are already under the umbrella of a VA loan because it uses your current eligibility for the same home which you initially financed during the purchasing process. You may have used your entitled by getting the VA loan when you purchased the home, substituted your eligibility for that of the seller if you assumed the loan, or some other circumstance. If you do have a certificate of eligibility that you can present to the lender, then it is helpful to show it prior to the use of your entitlement to ensure that the benefits can be distributed.

5. This option requires no money out-of-pocket to generate a result.
The IRRRL Program can reduce the interest rate of your mortgage under most circumstances when you go through the application process. Unlike with traditional mortgages or refi options, you will not need to have money available for this lending product to come through. You can include all of the costs of the new loan, or make the new loan at an interest rate that is high enough (but still lower than your current rate) to compensate the lender for their costs. That can be tricky sometimes if you have an ARM since the rate could go up in that situation, so you will want to evaluate what the final offer would do to your long-term financial picture.

Sellers can pay for some of the closing costs, although under VA rules, concessions cannot exceed 4% of the loan. Only some types of costs fall into this category, such as the payment of pre-paid closing costs, credit balance payoffs, or the payment of a judgment against the applying veteran.

6. You have the option to switch lenders with the IRRRL Program.
If you are unhappy with your current lender or are not receiving an IRRRL Program offer from them, then you can work with someone else to process your application. You are not required to go to the lender to whom you make payments now to take advantage of the benefits of this lending product. There is no mandate to work with the lender from whom you initially obtained the VA loan for your mortgage either.

According to Military.com, all veterans are strongly encouraged to contact several lenders as part of their application process to ensure that they receive the best deal possible. There can be significant differences between the terms offered by the various providers that you contact about the IRRRL Program.

7. The occupancy rules for the IRRRL Program are different.
You will discover that the IRRRL Program occupancy rules for this lending product are different from what they are with other loans from the VA. When you received your original mortgage offer, then you had to certify that you were either occupying the home already or intended to do so as your primary residence. When you pursue this lending option to convert your mortgage or lower your interest rate, then the only stipulation is that you need to certify that you previously occupied the property.

8. You can add up to $6,000 in energy efficiency improvements to the loan.
Although you cannot receive a cash benefit when you apply for the IRRRL Program, the VA does allow you to work with lenders to include a $6,000 benefit for energy efficiency improvements into the loan so that you can make upgrades to your property. That means you can take care of old windows, replace appliances, or tackle other projects which can help your house so that your utility costs can go down.

Even with this added benefit in place, some lenders may still offer you the opportunity to reduce a 30-year mortgage to 15 years. That can help you to save a lot of money in interest payments, especially if your final reduction 2% or better and you don’t need to roll some extensive closing costs into the lending product.

9. There is no cap on the amount you can borrow to finance your home.
The VA does not set a cap on the amount which you can borrow to finance your property through the IRRRL Program. There is a maximum level of liability that the VA will assume with this lending product, which means there is usually a cap on the amount that lenders are willing to offer when you submit an application. The loan limits are the amount which a qualified veteran with full entitlement can borrow without making a down payment.

The loan limits vary by county since the value of a home depends on its geographic location. Basic entitlements in 2019 are available to each eligible veteran in the amount of $36,000. Lenders typically provide a loan of up to four times that amount without requiring a down payment.

10. Some veterans do not pay the funding fee for the IRRRL Program.
Because of the service that some veterans provide for their country, the VA and the IRRRL Program exempt some people from the funding fee that is a general requirement of this lending product. You will not need to pay the 0.5% charge if you are a veteran receiving VA compensation for a service-connected disability. Veterans who would be entitled to receive compensation for this disability if they did not receive active-duty or retirement pay also qualify.

The surviving spouse of a veteran who died in service or lost their life due to a service-connected disability are included in this benefit as well.

List of the Cons of the IRRRL Program

1. Lenders can request appraisals and a credit check before making an offer.
Although the VA does not require a property appraisal or a credit check as part of the IRRRL Program, the lenders who offer a financial product to you do have the right to request these items. If you have a subpar credit history after receiving your VA loan, then it might be challenging to find someone who is willing to work with you to lower your interest rate or convert your ARM to a fixed-rate product.

Most veterans will discover this requirement as part of the overall application process, so make sure to ask questions about what information is necessary to evaluate your participation in this program so that you can know what to expect from it.

2. Some lenders might not present accurate information to you.
The IRRRL Program provides a specific series of policies and procedures to ensure that you can convert your ARM or receive a reduction in your interest rate for your mortgage. Military.com notes that some lenders “may say that the VA requires specific closing costs to be charged and included in the loan,” but this is not this case. The only cost that the VA requires lenders to charge as part of this refinancing package is 0.5% of the loan amount, which veterans can choose to pay in cash or have included as part of the lending program.

If you receive a misrepresentation beyond this fact, then you should stop the application process with that lender and approach someone else about your desire to use the IRRRL Program for your home.

3. You cannot receive any cash from the proceeds of this mortgage.
You cannot use the IRRRL Program as a home equity loan or a line of credit. The sole purpose of this lending product is to lower the current interest rate on your VA loan to take advantage of current market conditions or convert your adjustable-rate mortgage to one with a fixed rate. Lenders who promise you that it is possible to get a cash benefit out of this option are not being accurate with their claim – or not offering you something affiliated with the IRRRL Program.

The loan you receive through the IRRRL Program cannot exceed the outstanding balance you have on an existing VA loan. Exceptions to the stipulation are for any allowable closing costs or fees which are part of the process, including a funding fee and up to two discount points.

4. It is possible to create a loan that is greater than the fair market share of your home.
Although the IRRRL Program works to lower your monthly payments by reducing your interest rates or eliminating uncertainty with your budget by converting an adjustable mortgage to one with a fixed rate, but that does not guarantee that the final product will not put you “underwater” with your home. This disadvantage occurs when you owe more on your mortgage than the current value of the home.

If your property appraises for $150,000 and your IRRRL Program mortgage comes to $165,000 after closing costs and fees are rolled into it, then you would be $15,000 underwater until you either paid down the excessive amount or the value of your home rises to meet the debt that you carry. Should you find yourself in this situation, then it may become challenging to find a buyer for your property if you need to move for some reason.

5. Your property may need to appraise for more than the asking price.
If you want to receive an option for no down payment with the IRRRL Program, then most lenders will require that the property appraise for more than the asking price of the lending product. There might also be credit and income qualifications to meet with this option as well. You will still need to fall within the maximum amount that a lender is willing to offer based on the availability of your entitlement, so if your eligibility provides $36,000, you could receive an offer for no out-of-pocket expenses if the mortgage was below $150,000.

6. The funding fee is slightly higher for some qualifying veterans.
If you are a second-time user who did not make a down payment, then your funding fee with the IRRRL Program is going to be slightly higher than other veterans who apply for this lending product. Some Reserve veterans and those from the National Guard also pay a slightly higher percentage with their funding fees as well. You will need to refer to the current chart of loan fees published by the VA to know which category applies to you.

Verify this fee cost because in some situations, it could offset the savings amount that you earn with the lower interest rate.

Conclusion of the IRRRL Program Pros and Cons

The IRRRL Program is a simple way to reduce the overall cost of your mortgage if you are an eligible veteran. If you can meet the stipulations of the program, including the ability to see a lower interest rate, then your monthly payments can be significantly lower as an outcome. Although there are certain fees and costs to pay as part of this process, most homeowners can see better stability and fewer expenses over the long-term life of their loan.

There are times when the IRRRL Program does not make sense, such as when the interest rate drop is less than 1% or your ARM conversion creates a significantly higher expense. You will want to speak with your lender in these circumstances about altinterernative products that might be better.

These IRRRL Program pros and cons apply to qualified veterans only, so be sure to verify your status before starting the application process. If you already have a VA loan, then there is an excellent chance that you can benefit from this program.